Oil producers might have to live through the revised “lower for longer” scenario for the first half of 2016 despite the prospect for stronger oil demand growth towards the end of the year.
Looking back on 2015, the market experienced reasonable oil demand growth; that was not the problem.
The situation became critical when that reasonable growth in demand coupled with what OPEC might call an “unreasonable” growth in supply, particularly from non-OPEC players, threw the market into disarray.
With oil prices currently back near 12-year lows and down 12 percent in the first week of trading, Brent crude and WTI are both close to parity at around US$35 a barrel.
In the first week of trading in 2016, WTI hit a low of US$32 a barrel, but managed to recover a few percentage points before the week was over.
Not too long ago, the 2015 President of the Society Petroleum Engineers Helge Hove Haldorsen coined the catchy phrase, “fit at fifty.”
A price tag of US$50 a barrel would be most welcomed as we start a new year, but the consensus in the industry is that it’ll be a while yet before we embrace such a high price tag again on a daily basis.
As an average it might be as good as we’ll get for the year ahead.
The oil industry admits it got complacent with years of strong growth and higher oil prices until the middle of 2014.
Former head of of analysis at Lloyd's List Intelligence, Neil Atkinson says “the higher price encouraged investment in the higher cost areas that were previously out of bounds, but then when the price started to fall again, the people who invested the money in high cost weren’t all going to fall off their tents & disappear; they were going to find ways to cut costs and do what they’ve always done.”
Meanwhile the industry is not so much talking of a new diet, but an adjustment to an entire new lifestyle.
That will include a series of spending cuts, the deployment of smarter technology and more robust and strategic planning for the future.
The head of oil and gas consulting at Deliotte, John England has compared the situation to the common five stages of grief; denial, anger, bargaining, depression and acceptance.
While investment banks, analysts, traders and producers have accepted the status quo for now, they are all hoping and expecting growth to continue.
Slow growth is better than no growth, but the survival and maintenance programme put in place in these first few months of the new lifestyle will be critical.
Already the key players are predicting an average price of around US$50 a barrel for 2016.
In the meantime, the technical players in the market are watching with nervousness and caution as the January crude oil price tests key support levels at US$34 a barrel.
Inventories remain high and the strength of the US dollar continues to weigh on the market.
China of course looms larger than ever; the descending dark cloud on the horizon with its early 2016 stock market upheaval on a rollercoaster that caused the suspension of trading on the Chinese exchange twice in this first week of January.
The volatility will continue in the weeks to come with no clear policy from the Government or the People’s Bank of China.
Analysts and commentators are beginning to talk of the “perfect storm” that’s delivering a negative impact on global markets and investor confidence.
The disruption on such a major stock market coupled with slow economic growth, low oil prices and geopolitical uncertainties in the first week of the year makes for a challenging start to 2016.
The great fear will be the contagion effect as oil demand stalls in China and regional emerging markets are impacted, thereby possibly damaging emerging market growth and beyond.
In the immediate term, the Chinese government needs to address rising debt levels and investment-led growth, shifting to a more consumer led growth scenario with less government intervention.
This situation will not happen overnight and the country needs to maintain growth levels above 6 percent to ensure stability in the economy.
The country’s purchasing managers index slipped close to 50 in November, its slowest rate of expansion in 17 months.
American crude production remains healthy despite the outward signs of gloom, the rising unemployment in the sector and the cutbacks in investment.
The US Energy Information Administration, the EIA’s last figures of 2015 showed American production at 9.2 million barrels a day, slightly above the four-week average production of 2014.
Much of this oil is feeding domestic stock with US refineries operating above 92 percent of capacity.
But while the Americans might consume more domestic production, their demand for imported oil is impacted, though close to 8 million barrels a day for December 2015.
The EIA estimates that domestic production will fall in 2016, to average 8.8 million barrels a day.
While this news might be welcomed, it still leaves the market over supplied in a slow growth environment.
The geopolitical uncertainty appears to be priced into the market all year with an uneasy Middle East sinking deeper into turmoil.
The execution of a leading Shiite cleric by Saudi Arabia outraged Iran, leading to days of protest and violent retaliation against Saudi Arabia by burning its Embassy in Teheran.
Neighboring Gulf countries cut diplomatic ties, adding to the already strained relations in the region.
The ugly political climate will not bode well for unity in the OPEC ranks as both countries are major energy players.
Oil producers around the world have had one of their toughest years on record with prices down around 60 percent since summer 2014.
Saudi Arabia led the way in November 2014 when members agreed there would be no production cut even though the oil price was falling.
OPEC called on other countries that were over producing to cut back, making it clear that OPEC was only responsible for less than 40 percent of the global supply.
The OPEC Secretary General Abdalla El Badri was clearly frustrated at the recent November 2015 ADIPEC event in Abu Dhabi.
“Now, this burden must be shared and we sit with them twice, last year  and this year  and we said, let us agree that there is an oversupply, let us agree that we should share this burden together; but no, everybody says no.”
The UAE Energy Minister, Suhail AL Mazrouei defended OPEC’s action. “The price will change, but we are not going to subsidize the most expensive producers and its not a decision of one country or 2 countries, it’s a decision of a whole group.”
He also added that while the pain was being felt longer than expected, the organization stands by its decision adding, “every analyst and every economist in the world I think was convinced what was done was for the good and we did not have a choice.”
The OPEC Secretary General will continue his dialogue with many non-OPEC players and pressure is in place from all sides as the “pain sharing” continues.
Many analysts agree that OPEC should not necessarily give up market share, but they also doubt support will be forthcoming from the non-OPEC players, so the standoff continues.
The big fear remains the lack of investment and the steady cutbacks in major projects.
While this may be a prudent move in a low price environment, the danger is it might well set the seeds for a higher price in the future. El Badri says, “we need a price where producers can invest and consumers can have a decent supply.”
Finding that balance is proving tough but ultimately a lot is dependent on getting the fundamentals right.
El Badri added, “yes we have supply, a fair supply and producers can also have a fair income for the countries, for their companies and also they can invest for the longer term.”
When we look to the year ahead, its obvious there are signs of demand growth coming back to the market.
OPEC may be down, but its certainly not out of the game.
Cornelia Meyer, CEO of MRL Corporation said this is just another challenge to the organization. “They have endured many many tough circumstances, they’ve had to deal recessions, they endured high oil prices, they always had tough decisions to make.”
Non-OPEC production has eased slightly and analysts believe it will ease much greater this year, though new technology and enforced efficiencies is keeping more players in the business.
Geopolitical issues take time to resolve, but once they do, we can expect to see more oil from Iraq and from Libya.
Iran will be the wild card in a post-sanction world as the country looks forward to returning to the global oil market.
For now, it’s a waiting game and the key survivors will be those who implement efficiencies in an effort to stay in the game, making mean and lean the mantra for 2016.